Forensic Accounting: Definition and Overview

What Is Forensic Accounting?

Forensic accounting is a type of accounting where you investigate financial

information for potential evidence of crimes. Forensic accountants use
accounting, auditing, and investigative skills to understand whether a person or
company has committed financial misconduct, such as embezzlement or fraud.

One unique aspect of forensic accounting — different from what a typical

accountant does — is that forensic accountants use legal skills to determine if
financial activity is illegal and often present their findings in court.

“Forensic accounting encompasses the provision of litigation support and

investigation accounting services,” Alan Schachter, senior managing director,
economic damages and business valuation at Guidepost Solutions, says. “It
provides an accounting analysis that is suitable to the court which will form the
basis for discussion, debate, and ultimately dispute resolution.”

What Does a Forensic Accountant Do?

Forensic accountants work on a range of activities to investigate financial crime,

from analyzing documents to actually speaking in court. If you’re looking for a
career path in finance that also requires work in the legal sector, forensic
accounting might be the right career path for you.

Some everyday responsibilities of a forensic accountant include:

 Statement review: reviewing financial statements for inconsistencies or

signs of fraud
 Document review: examining financial documents, contracts, invoices, and
bank records for investigations
 Fraud detection: identifying fraud activities like embezzlement or money
laundering
 Asset tracing: tracing assets to determine who and where they came from
and whether they were involved in illegal activity

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  Data analysis: applying data analysis to look at large amounts of financial
data and spotting any anomalies that might indicate misconduct
 Interviewing: speaking with individuals involved in a case to gather
statements
 Expert witness testimony: presenting expert testimony in legal
proceedings, usually explaining complex financial concepts
 Due diligence: conducting financial due diligence to assess financial health
of a business, investment, or individual
 Litigation support: helping legal teams prepare for trial by providing
financial expertise

What Industries Are Forensic Accounting Jobs In?

Forensic accountants can work in a variety of sectors, whether in public practice or

for insurance companies, banks, police forces, or government agencies, Schachter
says.

For example, in an accounting firm, these accountants will work on an advisory

team or, in a larger company, in a special forensic accounting division. In
a consulting firm, they’ll work for a risk management consultant. Lawyers, law
enforcement agencies, insurance companies, and government organizations will
also hire forensic accountants full-time or on a contract basis.

How to Get Into Forensic Accounting

To get into forensic accounting, you’ll need the right education, certifications, and
technical and soft skills.

Education and Certification

Most forensic accountants major in a related field like accounting, finance,

or economics to gain their career skills. Some employers require a master’s in
accounting or an MBA with a focus on accounting.

Many, but not all, forensic accountants are also chartered accountants (CAs). CAs
are accountants with a specified amount of experience and education who have
passed the ICAN exam. While this certification isn’t required, it can help increase

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forensic accountants’ job prospects and pay and gives them credibility when
testifying in court.

Further certification includes the certified fraud examiner (CFE) certification. To

become a CFE, forensic accountants need a degree, a ICAN certification, relevant
work experience, and to pass a series of CFE exams. While this certification isn’t
required of forensic accountants, it can further develop their credibility and job
prospects and deepen their knowledge of fraud.

Skills

“The general educational background and skill set for general accountants/CAs and
forensic accountants are often very similar, but a forensic accountant must have a
more skeptical mindset and should have a general understanding of the legal
system, According to Matthew Greenblatt, senior managing director at FTI
Consulting, says. Forensic accountants should be ready to defend their conclusions
in a litigation, including, but not limited to, providing expert testimony in
deposition or at trial.”

Other hard skills include:

 Fraud investigation
 Data analysis
 Internal and external auditing techniques
 Writing skills
 Investigate skills
 Interrogative skills

To thrive in both the accounting and legal parts of the role, you also need soft
skills like:

 Attention to detail
 Communication
 Critical thinking
 Public speaking

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Terminology in Forensic Accounting

The training requires an understanding of three key terms: ‘forensic accounting’,

‘forensic investigation’ and ‘forensic audit’.

The terms are not strictly defined in regulatory guidance and the meaning of
forensic accounting is quite broad: it is the application of accountancy skills and
knowledge in circumstances that have legal consequences. There are many
circumstances with legal consequences in which accountancy might be required;
the most well known of which is investigating alleged fraudulent activity.

Forensic accounting is the term used to describe the type of engagement. It is the
whole process of carrying out a forensic investigation, including preparing an
expert’s report or witness statement, and potentially acting as an expert witness in
legal proceedings.

Forensic investigation is a part of a forensic accounting engagement. Forensic

investigation is the process of gathering evidence so that the expert’s report or
witness statement can be prepared. It includes forensic auditing, but incorporates a
much broader range of investigative techniques, such as interviewing witnesses
and suspects, imaging or recovering computer files including emails, physical
searches of premises etc.

Forensic auditing is the application of traditional auditing procedures and

techniques in order to gather evidence as part of the forensic investigation.

Application

The major applications of forensic accounting include fraud investigations,

negligence cases and insurance claims.

An insurance claim would require determination of how much the client should
claim from the insurer. The first step would be a detailed review of the insurance
policy to determine ‘coverage’, ie what is insured and any clauses that might
restrict the amount that can be claimed or invalidate the claim.

The second step would be to gather evidence to quantify the loss, ie the amount to
be claimed. Insurance claims might include claims following misappropriation of
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assets, ie theft of goods or money. In such cases, the forensic accountant will
review inventory or cash records and details of sales and purchases to reconcile the
amounts held and determine the value of the goods or cash stolen. They will also
test the reliability of the information held by counting a sample of inventory or
cash currently held in comparison with the client’s records. The forensic
accountant will not assume that there has been a theft; they will consider other
possibilities such as an error in the data held.

Insurance claims may however, be much more complicated than this, such as in the
case of business interruptions arising as a result of fire or flood. In these types of
engagements the forensic accountant will review prospective financial information
in comparison with reported outturn to evaluate the loss of profit arising as a result
of the business interruption. The forensic accountant will not assume that there has
been any loss of profit due to the business interruption; they will consider other
possibilities such as a straightforward loss of market share to a competitor.

Forensic engagements often require the forensic accountant to quantify a loss. One
such engagement is in professional negligence claims, ie when another accountant
has breached their duty of care to a client or third party resulting in a loss for that
client. In these types of engagement, the forensic accountant would also provide an
opinion on whether the duty of care owed has been breached, ie whether the audit
or other accountancy service was performed in accordance with current standards
in practice, legislation and techniques. In relation to an audit, this would require
consideration of whether the International Standards on Auditing were followed.

The need for a forensic accountant may also arise because two parties cannot agree
on the amount owed by one party to another, and the accountant is engaged to
provide an expert valuation, of a business for example.

This might be the case in a matrimonial dispute, where a divorcing couple whose
assets include shares in a company or partnership, engage a forensic accountant to
value the company so that a settlement can be reached. A similar process might
apply in partnerships, when one partner wishes to leave the partnership and is
being bought out by the remaining partner(s).

The role of an expert witness

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An expert witness is quite different to any other witness in court proceedings. Most
witnesses are 'witnesses of fact', ie they can only provide evidence on what they
saw, did or heard. Most importantly, they cannot give their opinion on any of the
matters about which they give evidence. By contrast, an expert witness is
specifically called to give their opinion on a particular matter.

An accountant can be called to give evidence as a professional witness, ie a witness

of fact, or an expert witness. In order to give evidence as an expert witness they
must be just that, an expert. They must be able to demonstrate a level of expertise
that means their opinion is valuable to the court. This means not only expertise in
accountancy, but also expertise in the particular area of accountancy that they are
giving evidence on.

A witness will provide a written report/statement to the court, and may also be
required to attend court to give live evidence, in person, and be cross-examined by
the ‘other side’.

However, not all forensic engagements will require evidence to be submitted to a

court. Often, the engagement will simply require a report for the client’s own
purposes or sometimes a report for use by the insurer.

Either way, a key skill necessary in being a successful forensic accountant is the
ability to explain complex accounting concepts in simple terms to someone who is
not themselves an accountant, whether that be as an expert witness explaining
matters to the judge or jury, or when explaining matters to the client. Forensic
accounting integrates investigative, accountancy, and communication skills.

Planning

Forensic accounting engagements are agreed-upon procedures engagements, not

assurance engagements. The forensic accountant will not provide an assurance
opinion – that is the role of the auditor when reviewing the amount of loss included
in the financial statements.

This will normally involve determining an appropriate value or quantifying a loss

as discussed above; this is quite distinct from an assurance engagement in which
the engagement team would review an amount determined by the client.

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As an agreed-upon procedures engagement, the forensic accountant will normally
prepare a report for the client that sets out their findings, based on the scope agreed
in the engagement letter. This report may be addressed to management, often in the
case of a fraud, or to the insurer.

It may be that a witness statement/report for submission to the court/arbitrator is

required in addition to or instead of a report to the client.

However, planning the investigation is likely to be similar to planning an audit or

any other assurance engagement.

Planning will commence with a meeting with the client in which the engagement
team will develop an understanding of the issue/events (the fraud, theft etc) and
actions taken by the client since it occurred.

A key part of planning is to confirm exactly what format the output is required in,
and exactly what matters are required to be covered within it.

At this stage any key documentation will be obtained and scrutinised – for
example, the insurance policy, the partnership agreement, the evidence that led to
the discovery of the fraud, etc.

The team will agree with the client, what access to other information or personnel
will be required and this will be arranged.

Based on the above, the team will design procedures that enable them to meet the
requirements of the client, as agreed. This may or may not include test of controls,
depending on the circumstances. There would be no need to tests control when
valuing a business for a matrimonial dispute. However, testing controls will be key
to determining how a fraud took place.

Procedures and evidence

Any method of obtaining evidence can be used in a forensic accounting

engagement – this is not a limited assurance engagement in which procedures are
likely to be restricted to enquiry and analytical procedures.

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Forensic engagements will include a detailed and wholesale review of all
documentation and electronic evidence available. The opinion given by the expert
accountant must be reasoned, and backed up by evidence. Their opinion cannot be
objective if only based on what they are told; they must corroborate that
information.

To be awarded marks in the exam, your procedures cannot be vague. They must be
specific enough that the engagement team could actually follow your instructions.

For example, it would not be sufficient to write 'interview the suspect'. You must
suggest questions that should be asked of the suspect in interview, depending on
the circumstances in the scenario. For example, the suspect could be asked to
explain their job role and what access that gives them to systems, cash, inventory
etc.

This also applies when recommending enquires of or discussions with management

– it must be clear in your answer what it is the engagement team should ask of
them, eg have they informed the police, has the suspect been suspended, have they
informed the insurer etc.

Equally it is not sufficient to suggest the use of computer assisted auditing

techniques (CAATs). You must specify how the CAATs could be used. For
example, data matching bank accounts used for paying suppliers with bank
accounts for paying employees, exception reports identifying employees who are
not taking holiday, etc.

In order to design appropriate procedures you must identify the type of forensic
accounting engagement, and the specific type of fraud, insurance or negligence
claim. For example, quantifying the theft of goods will be very different from
quantifying a loss from payroll or ‘ghost employee’ fraud or loss of profits
following a business interruption (as discussed above).

Fundamental ethical principles

The range of ethical and professional issues will be similar to any other type of
engagement. However, the importance of ethics is arguably much greater in
relation to forensic accountancy. Often both ‘sides’ will bring an expert witness to
the hearing where they do not agree. The decision maker must decide which
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evidence they ‘prefer’ – the credibility of the witness is often the primary factor on
which they can base that decision and the credibility of an accountant is reliant on
their compliance with the fundamental ethical principles.

In the exam, you will also need to note whether the client requesting the forensic
accounting service is an audit client, if so, this will present an additional and
particularly important threat to objectivity; a self-review threat. The investigation
is likely to involve the quantification of an amount, which will then be reviewed as
part of the financial statements audit. The significance of the threat will be
affected by the materiality of the amount and the subjectivity involved in
quantifying it, eg if for loss of profits following business interruption this will be
more subjective than quantification of the value of stolen inventory.

Remember that the decision to prosecute is a matter for the client. Often, clients do
not want to prosecute for fear of damaging their reputation. The forensic
accountant can provide the client with an analysis of all of the facts, but must not
make the decision to prosecute (a management threat to objectivity). The forensic
accountant has a duty of confidentiality, unless it is in the public interest to do so,
they must not disclose the fraud to any third party including the police, without
client permission.

A final note

Remember that a forensic accountant is just that; an accountant! Their role is to

provide an accountant’s expert opinion or analysis of the facts. They are not the
law-enforcer, prosecutor or judge. Be careful in the exam not to detract from an
otherwise professional answer by getting carried away with suggestions such as
taking fingerprints or DNA evidence or blood samples, or catching and punishing
the culprit – that is not the role of an accountant.

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Summarily presented,

FORENSIC ACCOUNTING

Forensic accounting is the branch of accounting that deals with the detection and
prevention of financial crimes. As a forensic accountant, you'll use your
competencies in accounting, auditing, and investigative techniques to detect and
analyze cases of fraud and other financial crimes

What a forensic accountant does?

Forensic accountants apply scientific methods to investigate financial issues in
litigation or criminal cases. They specialize in unraveling financial puzzles,
assisting with fraud investigations, assessing internal controls, and conducting
proactive fraud risk assessments.

What are the three main areas of forensic accounting?

Training in forensic accounting provides the necessary skills and expertise to
investigate such cases. Forensic accountants usually apply their skills in the
following three primary areas: litigation support, investigation, and dispute
resolution.

What is the main aim of forensic accounting?

The main objective of forensic accounting is to find proof of a crime and to present
it in a way that can stand up in a court of law.

What are the two types of forensic accounting?

Forensic accounting is often divided into two main categories: (1) investigative
services and (2) litigation/dispute services. In reality, these two categories are
intertwined and overlapping, with an infinite number of subcategories and service
types.

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 Below are four steps that forensic accountants follow when investigating financial
crimes or issues.
 Map out the investigation. The first step involved in investigative accounting is
preparation. ...
 Gather evidence to support the case. ...
 Prepare the report. ...
 Testify in court.

What are the steps in forensic accounting?

Accepting the Investigation
 Identifying the type of fraud that is operating, how long it has been operating for,
and how the fraud has been concealed.
 Identifying the involved fraudster.
 Quantifying the financial loss that has been suffered by the client.
 Gathering the financial loss information suffered by the client.

What are the four steps of the forensic process?

 The general phases of the forensic process are the identification of potential
evidence,
 the acquisition of that evidence,
 analysis of the evidence,
 and finally production of a report.

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